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There's light at the end of the Eurotunnel

Well-placed Hiscox still a buy; Don't bet on Arena Leisure

Stephen Foley
Wednesday 17 April 2002 00:00 BST
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Eurotunnel has for so long been seen as a black hole into which investors put their money at some peril, that it is with much trepidation that the City is now predicting light at the end of the tunnel.

But the latest in a long line of debt restructurings, being put to its lenders this month, could mark a turnaround, and there was more positive evidence from the underlying business yesterday.

Eurotunnel said that it has finally dealt with the disruption caused by the asylum seekers of the Sangatte refugee centre near the French end of the tunnel. It put new security measures in place at the end of last year after refugees made organised efforts to storm the tunnel and head for the UK. Their incursions had cost the business £20m in 2001.

It is also recovering from the string of other problems that blighted the stock last year, including the business slowdown and foot-and-mouth outbreak that hit freight levels. Operating revenues were up a little in the first three months of 2002, to £130.3m from £129.1m in the same period last year. The rise was pleasing, since it came in the face of a £4.5m decline in "non-transport" income, which included payments from telecoms firms using the tunnel for cable links to the Continent.

There was early evidence, too, that recent price increases on its truck shuttle service has not eroded market share, which is still 42 per cent of cross-Channel freight. The number of cars transported was down 10 per cent, though, after Eurotunnel admitted it could not compete at the budget end of the passenger market. Similarly, higher prices for coaches hit its market share, but kept revenues the same.

Eurotunnel predicts a steady pick-up in activity throughout the year, and analysts still think there is a chance it could break-even – before interest payments – this year if the debt restructuring goes through.

The restructuring will lop £400m from the debt, replace short-term debt with longer-term instruments, and cut interest payments from 2006, just in time for when protection from its banks expires. Some analysts think a successful outcome could add another 20p to the share price at a stroke. Investors should of course remain cautious. The deal is no shoe-in, with several different classes of creditors to be appeased, and Eurotunnel is still left with an eye-popping £6bn debt pile. On one recent analysis, by BNP Paribas, the company is still one of the most likely on the market to go bust.

These dangers are heavily discounted in the share price, which should make the stock an attractive gamble for those with an appetite for risk. It remains a favourite of retail investors for the perks of share ownership. Although not as generous as in the 1987 flotation or the 1990 rights issue, these still entitle shareholders to a third off some journeys for a £7,000 investment.

Investors who back shares at these levels could enjoy a profitable ride.

Well-placed Hiscox still a buy

There is a strict rule on lunchtime drinking at Hiscox, the Lloyd's of London insurer which also underwrites the wine and art of the rich. It is that no one, from directors down, can return to the office with alcohol on their breath.

Its corporate culture reflects its business strategy. In the midst of the old boys' club that still prevails at many Lloyd's insurers, Hiscox aims to be a modern professional outfit with a disciplined approach to underwriting.

The strategy has been stress-tested in recent months. Despite writing large amounts of property insurance and reinsurance, Hiscox's liabilities from the World Trade Centre attacks are only £30m. This is still a substantial sum, but looks small compared to the £125m that Cox, a similar-sized insurer, has to cough up.

Having weathered the losses of last year, Hiscox is experiencing a 50 per cent average increase in commercial premiums. The company is taking full advantage of it, raising £54m at the end of last year and ploughing nearly half of that into expanding its property, intellectual property and kidnap lines.

But Hiscox is also keen to reduce its overall exposure to the profit cycles of commercial insurance and is boosting its retail side with a further £20m of new money.

Hiscox's shares slipped 1.5p to 133.5p as it announced a £21m operating loss for 2001 and said it would not pay a dividend. It will reinstate the dividend when it returns to profit, which it is projected to do this year, with pre-tax profit forecasts of £22m for 2002 and £39m for 2003.

Hiscox is deservedly expensive compared to peers, trading at 1.7 times net tangible assets, compared to an average in the Lloyd's sector of 1.1 times. The premium is due to a bid approach last year from Chubb, the American insurer which is its largest shareholder. Chubb is widely expected to make another approach later this year and in the meantime Hiscox will be busy Hoovering up new business on very favourable terms. Buy.

Don't bet on Arena Leisure

It is unsurprising that shares in Arena Leisure, the horse racing group, are a favourite of the stock market's most hardened gamblers. It is more worrying that management has bet the future of the company on attheraces, a new digital racing channel with on-screen gambling to be launched next month.

Identifying a gap in the market and creating a business is one thing, but ploughing cash into an unproven concept that attempts to create a whole new market is quite another. Arena's future rests on the hope that some intensive marketing of the attheraces concept will significantly expand the £6bn bet on horse racing every year, rather than just tempt punters from the betting shops. The business won't be profitable until 2006, and even that rests on some heroic assumptions.

It was vaguely disappointing to see that just 3,300 people have placed a bet on the internet version of attheraces, which launched last November, and that the average bet was only £7. That might mean early revenues don't quite come up to expectations.

The attheraces business is a joint venture with Channel 4 and BSkyB and there was some good news yesterday. It has rescheduled payments of the £307m it paid for the broadcasting rights to UK racing. It has also raised two-thirds of the money it needs to pay next year by licensing some content to other broadcasters.

The rest of Arena's business has also started bringing in cash. It owns six race courses, and although some are up for sale, there are opportunities for expansion with a move to allow casinos and other gaming opportunities on site.

Some punters may gamble there is money to be made on the shares in the short term. The newsflow on relaxed gambling and racing regulations, and the launch of the TV channel, could spark a rally. The shares rose a penny to 41.25p. But this is not one to put in the pension fund and long-term investors should sell.

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